A corporation or other entity, which utilizes shares or stock to represent ownership therein, has as one of its objectives to maximize the value of shares or stock. There are a number of factors which can influence the value of a business and, hence, the value of the shares or stock of the business. Among these factors are the financial condition of the respective business that can be reflected in certain financial statements, such as, but not limited to, balance sheets, income statements, and other financial reporting statements. Ideally, business managers desire to report the most favorable conditions that are allowable under applicable laws, rules and regulations, which govern financial reporting activities.
It is not uncommon for a business to have, as part of its on-going operations, an operating unit or segment which, for one reason or another, may be viewed as a “drag” on, or adversely affect, the business' financial condition. For example, a business may have an operating unit that may be a low-margin or low-growth unit. Nevertheless, the business may be legally or morally obligated to maintain this low-margin or low-growth unit in operation. In other words, a business may, for one reason or another, be prevented from selling or “spinning-off” an otherwise financially undesirable operating unit.
Low-margin or low-growth operating units may have certain less than favorable financial operating characteristics associated therewith which, when included in the financial reporting statements of the business as a whole, can have adverse effects on the financial condition of the business and, correspondingly, can prevent the shares or stock in the business from attaining desired value levels. For numerous reasons such as legal and/or regulatory, the low-margin or low-growth operating unit(s) may not be able to be severed from the business.
As an example, one can look to insurance companies that typically have entities characterized as low-margin or low-growth businesses. While insurance companies have historically been known to provide a steady and predictable income stream for a business, laws, rules and/or regulations, which govern the operation of same can serve as an impediment to a business. Certain types of insurance may serve as an impediment to the overall business which owns same and which operates other unrelated on-going business units. Insurance companies and/or insurance policies typically provide policyholders with a dividend or bonus at the end of an operating period that can reflect profits made by the overall insurance company during that period.
Although, the current trend in the life insurance business has been to de-mutualize insurance companies which have insurance policies outstanding are still required to service these policies under existing policy guidelines. As will be readily appreciated, a conflict arises when a business desires to “spin-off” or issue an initial public offering for an insurance company or operating unit. The shareholders investing in the “spin-off” or in the initial public offering would reasonably expect to share in the profitability of the insurance entity, but the insurance entity would be obligated to dividends or bonuses, or in other words, shares its profits, with existing policyholders.
Another drawback associated with life insurance operating companies in general is that they are typically constrained from issuing unregulated debt instruments in financing operations. Traditionally, insurance companies would utilize existing assets including policy holders surplus, and expected policy premiums, in order to fund its operations while obtaining reinsurance in order to protect itself from financial downturns. A parent company of an insurance business may also, in order to protect existing client relationships and/or to protect its goodwill, elect to maintain the operations of the insurance unit.
As a result of the above, a business having an obligation to try to achieve maximum share value or stock value for its respective shareholders or stockholders may have to contend with maintaining an otherwise low-margin or low-growth business unit in operation to the detriment of its shareholders or stockholders. This may prove to be most disadvantageous to a business as it attempts to execute new business initiatives or operating strategies.